Today

1
Today

• Begin Monopoly

2
Monopoly

• Chapter 22

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Four Basic Models
Monopolistic Competition Some firms
Monopoly One firm
Oligopoly A few firms
Perfect Competition Many firms
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Profit-Maximizing Monopolist

• Suppose only one seller in the market.
• For now, assume it sells all its output at the
  same price (no price discrimination).
• Choose Q to maximize
• profits TR - TFC - TVC.
• TFC do not depend on output, so maximize TR -
  TVC.

5
Marginal Revenue

• Recall for the price-taking firm, MR P.
• But the monopolist faces the market demand
  curve. As he sells more, he moves down the D
  curve and price falls.

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Graph of Marginal Revenue
P
What is the MR of the 4th unit? How does that
compare to price? Will it ever be possible to
gain the price as MR?
A
10
B
Lost 3
9
Gained 9
D
3
4
Q
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Monopolists Marginal Revenue
The monopolists marginal revenue (MR) curve lies
everywhere below the demand curve. MR lt P.
P
D
MR
Q
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Special Case Straight-Line Demand
The MR curve for a straight-line D curve lies
1/2-way between the D curve and the vertical
axis.
P
D
MR
Q
10
5
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Special Case Straight-Line Demand
Recall Price elasticity falls as we move down
the straight-line D curve. Total revenue rises
then falls as we move down the straight-line the
D curve. When ? 1, revenue is at its maximum.
Thats when MR 0.
P
? 1
D
MR
Q
10
5
10
Choosing Quantity

• Maximize TR - TVC
• TR is area under the MR curve.
• TVC is area under the MC curve.
• Therefore maximize the difference.

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Choosing Quantity
Profits are maximized when MR MC.
P
TR - TVC
MC
D
MR
Q
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Monopolists Profit-Maximizing Rule
Choose Q where MR MC, charge the highest price
possible. Check In SR, is P ? AVC? In LR, is P
? ATC?
P
MC
p
D
MR
Q
Q
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Monopolists Profit-Maximizing Rule
Will this monopolist produce in the LR? In the
SR? Can you identify profits or losses?
P
MC
p
ATC
D
MR
Q
Q
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Monopolists Profits
P
MC
p
ATC
D
MR
Q
Q
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The Monopolist A Supply Curve

• A monopolist does not have a supply curve!
• He chooses his best price quantity combination
  on the market demand curve.
• He is not a price taker, so the concept of a
  supply curve doesnt make sense.
• He is a price maker.

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The Monopolist and Efficiency

• Productive efficiency Some have argued that a
  monopolist may get lazy and not keep costs at a
  minimum.
• Others argue that if its goal is to maximize
  profits, that will be incentive enough to
  minimize costs.
• This issue remains unsettled.

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The Monopolist and Efficiency

• Allocative efficiency Look at the sum of
  producers and consumers surpluses.

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Consumers Surplus
CS the area under the demand curve but above
price.
P
MC
p
D
MR
Q
Q
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Producers Surplus
PS TR - TVC PS the area under price but above
MC.
P
MC
p
D
MR
Q
Q
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Sum of Producers and Consumers Surplus
Does the monopolist produce the quantity that is
allocatively efficient?
P
MC
p
D
MR
Q
Q
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The Allocatively Efficient Quantity
More PS CS could be gained by producing QE. The
marginal benefits of the addl units are more
than their marginal costs.
P
MC
PM
D
QE
Q
QM
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Efficiency of Monopolist

• If the monopolist were to produce sell the
  efficient quantity, he would have to set a lower
  price.
• We say the monopolist reduces output and raises
  price compared to the efficient solution.
• This causes a deadweight loss of producers
  consumers surplus.

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Deadweight Loss of CS PS
Represents the cost to society of not producing
the efficient quantity of this good.
P
MC
PM
D
QE
Q
QM
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Effects of Monopolies

• Produce less than the efficient quantity.
• Charge higher prices as a result.
• Consumers are hurt on both counts.

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Coming Up

• Barriers to entry the monopolist.
• More price discrimination

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Group Work

• Try to complete the exercise without looking back
  at your notes.
• Identify on the graph for a Monopolist
• the profit-maximizing level of output.
• the price that the monopolist will charge
  (assuming he charges a single price for all
  units).
• the total profits or losses of the monopolist

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More things to identify

• consumers surplus
• producers surplus
• the allocatively efficient quantity
• the deadweight loss associated with having a
  monopoly in this market
• the supply curve

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Monopolists situation